91훑괵 NEWS | The Reporters

Long-awaited solution?

Evan Davis | Small Change |
19 Sep 07, 07:01 AM

The trouble started in the US, and the Federal Reserve's decision to cut interest rates had been awaited for weeks as one potential solution to it.

Indeed, there are worries the US might have become overly dependent on the Fed coming to the rescue at times of financial difficulty - if Superman is always there to save the day, then doesn't Lois Lane let herself get into trouble?

But at the moment, such concerns are not bothering Wall Street. They got what they wanted - the authorities to shift their recent preoccupation with inflation, and to ease the pain of those that have been suffering from their lending decisions. As it is, the US is adjusting to a slowdown - from growth rates of about three per cent, to those of about two per cent.

That adjustment is probably inevitable, as Americans move to more sustainable levels of borrowing and saving, and not even Superman can prevent that. But the goal is simply to prevent a slowdown turning into a recession, particularly given falling house prices.

However - in the UK, where similar issues arise, the heroic job of steering the economy through current stresses is being made far easier by falling inflation. If the Bank of England doesn't have to worry about that, it has more room to manoeuvre to deal with other problems, perhaps sometime following the US with lower interest rates.

Comments Post your comment

1.
At 12:21 PM on 19 Sep 2007,
wrote:

Aren't we in this position because central banks have lowered interest rates too low for too long. Aren't we just postponing the correction...might not a mini-recession be better now than a nasty one later?

2.
At 12:29 PM on 19 Sep 2007,
Damian wrote:

Ivan,

The core point of your article is spot on. The fed have always cut interest rates on the downside of a bubble. Effectively re-mortgaging then re-re-mortgaging the future to prevent a crisis today. I can not see how you can continually push debt into the future without it coming back to hurt you at some point.

Effectively though the main people rescued are the bankers. They are encouraged into further riskier deals because the Fed will save them.

You mention falling inflation coming to the aid of the BOE. Of course inflation was falling before the current crisis but the crisis itself has cause further downward pressure on inflation. I believe that stationary or even rising inflation may well have been pegged back.

3.
At 12:57 PM on 19 Sep 2007,
wrote:

History will tell this rather than becoming judgemental -- remember what happen to Greenspan legacy in the USA - where he had been casted for interest rate cut till debit crisis loomed large on the world economy.

4.
At 01:52 PM on 19 Sep 2007,
Gary Dibley wrote:

Inflation will start to creep back up, as recent oil and commodity prices feed through and the China effect dwindles. RPI inflation actually rose last month and the seemingly re-invigorated unions will focus on this measure like the general public. CPI is a discredited measure and was only introduced by Gordon as a tool to maintain low interest rates (along with unhindered immigration). The are turbulent times ahead.

5.
At 02:12 PM on 19 Sep 2007,
Bedd Gelert wrote:

I am glad that the position has been clarified in respect of the policy for any other banks who might find themselves in the 'Northern Rock' scenario. I was worried that you had given the impression that Alistair Darling had written a blank cheque for the UK financial services industry, when clearly he has not.

He has, however, opened up the risk of 'moral hazard', since I can't see the firms involved reining in their credit policy greatly - although the drop in NR's share price may give them pause for thought.

But I am more interested in what you make of the Tory response to this ?
David Cameron was giving a clear spin [if not any actual policy] that gave an indication he would welcome some control over credit policy. However Ken Clarke made it absolutely clear that he does not want this to be used as an excuse for greater regulation of the financial services industry.

Who is telling the truth ??

6.
At 02:17 PM on 19 Sep 2007,
Keen Bean wrote:

Evan, sir. If I could wish for one thing it would be that you increase the frequency of publishing these blogs.

And I completely agree with the statement that Lois can fall back with her eyes closed knowing Superman has her back. Let's just hope Superman doesn't become Lois' puppy.

7.
At 02:27 PM on 19 Sep 2007,
wrote:

I suppose the interesting question is whether this Fed decision is the end of the beginning or the beginning of the end?

One of the main reasons behind the current complicated relationships that banks have with one another is the fact that interest rates have been consistently lowered to keep a floor under the market, for instance in 1998 with the collapse of LTCM and again at the end of the technology boom and 9/11.

It could be said that by doing this the Fed's actions just put-off the inevitable fact that banks are going to have to sort out their balance sheets, and this will involve losing an awful lot of money in some cases.

In this sense, a recessions is no bad thing, in general terms, because it would reinforce the fact that markets have gravity: what goes up must, eventually, come down; cheap money just pushes back the day of reckoning.

8.
At 02:52 PM on 19 Sep 2007,
john thomas wrote:

"life moves pretty fast around here. if you don't stop once n awhile, you might miss it" Ferris Bueller 1987

While we don't, this month, have a problem with inflation what about next month when high higher food and petrol prices start to feed through?

And surely any downward move in intrest rates would just be pouring proverbial oil on the fire that is the current overheated UK housing (morgage?) market? And what will be the inflation busting consequences of that?

And as for the Fed and Wall St.? Well like small children, the less often you say no to them, the harder it becomes to say no at all! By dropping rates by 1/2% the Fed is encouraging the very cycle of borrow and spend amougst US consumers that got us all into this mess in the first place!

All that has occurred in the last few days is a postponement of the bust that follows after boom.

9.
At 03:23 PM on 19 Sep 2007,
Ian Kemmish wrote:

Yesterday, I thought cutting by half a point was a sure sign of panic. This afternoon, I see it was actually backed up by a surprise dip in August CPI figures. Obviously, the Fed had access to these figures before the rest of us did.

In these days of black box trading systems with sub-millisecond reaction times, is there perhaps an argument for saying that central banks should base their decisions solely on statistics which are already in the public domain, in order to avoid the risk of being misunderstood at sensitive moments?

10.
At 04:28 PM on 19 Sep 2007,
wrote:

I second Keen Bean. With a once in a generation run on a UK bank in progress, you've been awfully quiet on the blogging front Evan!

11.
At 05:52 PM on 19 Sep 2007,
s fraser wrote:

Falling inflation? At out local bakery a loaf of wholemeal bread has gone up from 86p to 짙i.26 this week. The butcher next door has had a similar hike in prices due to shortage of corn and foot and mouth. What happens when these rises wash through to the official figures?

12.
At 06:17 PM on 19 Sep 2007,
A H DUNCAN wrote:

Sir,
The main reason behind the present situation is that Bank Manmagers are rewarded for the amount of money they push out. When the chickens come home to roost they have moved on and generally upwards.

We should never have come off the gold standard

13.
At 08:22 AM on 20 Sep 2007,
wrote:

The US is a "fantasy continent" - living well beyond its means, propped up by bowel-loosening amount of debt. Both budgets (govt and trade) are in dire shape. The Saudis are about to unpeg themselves from the dollar (sacrificed, so that Wall St can party on).

Do I need to spell out another country in a similar position?

The Old Lady is now dating the Treasury, some say she's on the phone to her new darling every day!

Every bust is preceded by a boom.

14.
At 01:38 PM on 21 Sep 2007,
Chris S wrote:

Here we go again....

15.
At 10:35 PM on 22 Sep 2007,
Colin Smith wrote:

OK, so let me get this right...

The US has had low interest rates for so long that the US banks have run out of customers to sell loans to. So they started selling to people who couldn't afford it...

Now, lowering interest rates so that the banks can sell more loans is. A good idea?

And if they do sell more loans? Increased money supply pushes the value of a US dollar down further.

But the value of the dollar is at least partially supported by it's status as the oil reserve currency. The drop means the oil producers reserves lose value.

So, what happens if they abandon it? What about China? Japan? They have huge reserves of US dollars and bonds. All losing value as the dollar drops. They can't possibly be happy about that...

16.
At 08:38 PM on 17 Oct 2007,
Lossaversion wrote:

As the great late Yogi Berra said its deja vu all over again

This time around we have a combination of previous crises rolled into one ie bank run, credit squeeze, stock markets at lofty levels, policymakers at a loss, commodities sky high and G7 trying to talk up the dollar.

The equity markets are now in irrational exuberant mode as the latest generation of raders forget the past and contunue to drink the booze at a party they do not see will fizzle out.

The decoupling story about China is akin to the new economy rubbish touted during the tech boom

Shades of asset price and deflation, ecoonmic stagnation and consumer price inflation are likley to be the outcome of the debt binge of the last 10 years

Canned food, bottled water and fotress living anyone?